This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

FRS103

Overview

An insurance contract is defined in FRS 102 as “a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.  Although FRS 102 includes a definition of an 'insurance contract' it does not set out the accounting required for such a contract. Instead, a separate standard FRS 103 "Insurance Contracts" issued by the FRC in March 2014 contains specific accounting requirements for that have insurance contracts (including reinsurance contracts) and are applying FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. 

FRS 103 consolidates existing guidance included within the International Accounting Standard Board’s (IASB’s) IFRS 4 Insurance Contracts, the existing requirements of FRS 27 Life Assurance and elements of the Association of British Insurers’ Statement of Recommended Practice on Accounting for Insurance Business (ABI SORP).  It allows entities to continue with their current practices for insurance contracts (subject to certain additional considerations, such as, for example, identification of embedded derivatives) whilst also allowing them the flexibility to take advantage of “improvement options” (subject to legal and regulatory requirements) similar to those which are available to entities applying IFRS 4 in the UK and Republic of Ireland.  

For entities preserving current practices of applying Modified Statutory Solvency Basis (MSSB) the references for key definitions have been updated by referring to rule 1 of INSPRU as at 31 December 2015. FRS 103 allows entities to improve accounting policies to be more consistent with the Solvency II recognition and measurement rules for technical provisions, provided appropriate adjustments to those rules are made to ensure accounting policies result in information that is more relevant and no less reliable, or more reliable and no less relevant. The Accounting Council’s Advice to the FRC lists examples of the types of adjustments the entities might need to consider. 

FRS 103 requires disclosure that: 

  • identifies and explains the amounts in an insurer’s financial statements arising from the insurance contracts (including reinsurance contracts) it issues and reinsurance contracts that it holds;
  • relates to the financial strength of entities carrying on long-term insurance business; and
  • helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from those insurance contracts.

In December 2017 there were minor amendments made to FRS 103 as a result of the triennial review.

History of FRS 103

Date Development Comments
20 March 2014 FRS 103 issued Effect for periods beginning on or after 1 January 2015.
11 December 2015 FRED 64 Draft amendments to FRS 103 Insurance Contracts issued Comments closed on 28 February 2016
26 May 2016 Amendments to FRS 103 Insurance Contracts - Solvency II issued Effect for accounting periods ending on or after 1 January 2016.  Early adoption is not permitted
13 February 2017 Amended version of FRS 103 issued

FRS 103 is effective for accounting periods beginning on or after 1 January 2015.  Early application is permitted.  The May 2016 amendments are effective for accounting periods ending on or after 1 January 2016.  Early adoption of the May 2016 amendments is not permitted.  

14 December 2017 Amended by Amendments to FRS 102 – Triennial review 2017 – Incremental improvements and clarifications

Effective for accounting periods beginning on or after 1 January 2019. Early application is permitted provided that all the amendments to FRS 103 as a result of the triennial review are applied at the same time.

28 March 2018 Revised version of FRS 103 issued

FRS 103 is effective for accounting periods beginning on or after 1 January 2015.  Early application is permitted.  The May 2016 amendments are effective for accounting periods ending on or after 1 January 2016.  Early adoption of the May 2016 amendments is not permitted.

See above for the effective dates of the May 2016 amendments

In December 2017 amendments were made to this FRS as a result of the triennial review 2017. An entity shall apply the amendments to FRS 103 as set out in the Triennial review 2017 amendments for accounting periods beginning on or after 1 January 2019. Early application is permitted provided that all the amendments t0 FRS 103 are applied at the same time.

Scope

The new standard is applicable to entities that have insurance contracts (including reinsurance contracts) and are applying FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.  The standard is also applicable to entities applying FRS 102 who issue financial instruments with a discretionary participation feature [FRS 103.1.2-FRS 103.1.3]

FRS 103 does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (covered in Sections 11 Basic Financial Instruments, 12 Other Financial Instruments Issues and 34 Specialised Activities of FRS 102), except in paragraph 1.8 and in the transitional provisions in paragraph 6.4. [FRS 103.1.6].

FRS 103 is not to be applied to:

  • product warranties issued directly by a manufacturer, dealer or retailer (see Sections 21 Provisions and Contingencies and 23 Revenue of FRS 102);
  • employers’ assets and liabilities under employee benefit plans (see Sections 26 'Share-based Payment' and 28 'Employee Benefits' of FRS 102) and retirement benefit obligations reported by defined benefit retirement plans (see 'Section 34' of FRS 102);
  • contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessee’s residual value guarantee embedded in a finance lease (see Sections 18 Intangible Assets other than Goodwill, 20 Leases and 23 Revenue of FRS 102);
  • financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either Section 21 of FRS 102 or this FRS to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable;
  • contingent consideration payable or receivable in a business combination (see Section 19 Business Combinations and Goodwill of FRS 102); or
  • direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the policyholder) (for which an accounting policy shall be selected in accordance with the principles of FRS 102). However, a cedant shall apply this FRS to reinsurance contracts that it holds.[FRS 103.1.7].

Effective date

FRS 103 is applicable for accounting periods beginning on or after 1 January 2015. 

The May 2016 amendments are effective for accounting periods ending on or after 1 January 2016.  Early adoption of the May 2016 amendments is not permitted.

FRS 103 is expected to have a limited life and will be revisited by the FRC following the publication of IFRS 17 Insurance Contracts by the International Accounting Standards Board (IASB). 

IFRS 17 Insurance Contracts was issued in May 2017 and is effective for periods beginning on or after 1 January 2021. The FRC has clarified that it still intends to review FRS 103 at a suitable time, but consistently with the approach to other major new IFRS, e.g. IFRS 15 Revenue from Contracts with Customers, this is likely to take place once more IFRS implementation experience is available.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.